Procyclical Policies: A Solution for Immigration Reform Tied to the Business Cycle
Saint Thomas Academy
Mendota Heights, MN
Over the past several decades, the amount of foreign-born residents in the United States has increased dramatically from 4.7% of the total population in 1970 to 12.9% in 2010, and it is still rapidly increasing. This increase has led to immigration reform becoming one of the most important and contentious issues in US politics according to the Pew Research Center. An article coauthored by Federal Reserve Vice President Pia Orrenius describes procyclical immigration policy as a politically neutral immigration reform that would be economically advantageous to both native citizens and foreign-born residents. While long-run immigration rates will typically settle to a certain level over time–based on many factors such as political trends–the main tenant of the procyclical immigration policy is that it adjusts the short-term immigration rate to the current movement of the business cycle; evidence suggests that this would stimulate growth in economic booms and reduce hardship during slowdowns. This paper will explain the mechanics and advantages of a procyclical immigration system and will further demonstrate its legitimacy as a policy for the U.S. by looking at a similarly implemented program in Canada.
A large immigrant population has the ability to amplify the effects of the business cycle on an economy. “Immigrants’ economic outcomes in the short run are more strongly tied to the business cycle than those of natives” because a higher percentage of them are members of the “education groups” and “industries” that are impacted most by the rises and falls of the business cycle. Thus, the higher percentage of immigrants in a society, the greater the effect the business cycle has on the whole population. Due to this amplifying factor of immigrants, an article published by the Federal Reserve states that “immigration policies that are flexible to adjustments based on market signals may be beneficial for the destination economy.” The premise of a procyclical policy is to increase employment-based immigration during times of economic prosperity and reduce it during economic downturns, so as to amplify the growth of the booms and minimize loses of the recessions.
Excessive immigration during economic recessions has negative consequences for native citizens and foreign-born residents because it increases competition for a limited supply of jobs, exacerbating the recession. Furthermore, immigration during economically weak periods economically scars immigrants for years after they arrive. A study in the Journal of Population Economics shows that immigrating during times of high unemployment results in reduced wages that last for 18 years after the economy recovers. Even so, research published by the Council on Foreign Relations shows that “legal permanent immigration [is] insensitive to the U.S. business cycle” and “quotas for temporary legal immigration do not track the U.S. economy with much precision.” Therefore, the US government must establish a procyclical immigration policy or else the labor pool will be inundated with workers during recessions, worsening the situation.
Many researchers, including the Council on Foreign Relations, have concluded that immigration during times of economic growth makes the economy more productive and efficient. In the United States, there is a pervading fear that increased immigration will overly increase the supply of labor and therefore reduce wages. However, a paper published by Oxford University, George Borjas suggests that immigration raises the incentive for capital accumulation, which counters the impact on wages so that at most only 3% of the population is affected. And in fact, further studies show that the wages of native workers from lower education groups are may be completely unaffected by increased immigration. In addition, research published by the University of Chicago shows that reduced costs of labor due to immigration result in a significant reduction of prices in labor-intensive services, further counterbalancing the effect of the wage reduction. Overall, it is clear that employment-based immigrants amplify growth by fulfilling the high demand for labor, contributing to GDP and paying taxes, so if the United States adopted a procyclical system, the influx of employment-based immigrants during economic upswings would magnify the economic expansion.
Canada’s immigration system during the 20th century exemplifies the benefits of a procyclical policy. In 1947 Canada adopted a procyclical immigration policy which allowed it to enter into a period of unprecedented economic growth. Under its procyclical system, Canadian immigration rates were at their highest during the business cycle’s peaks and their lowest during its troughs. This allowed immigrants to expand the economy during times of economic prosperity and prevented them from exacerbating economic hardship during recessions. However, during its early 1990s recession, Canada experimentally abandoned its procyclical policy of reducing the immigration rate and instead left it where it was. The influx of immigrants into a negative economic situation created a large population of poor immigrants. Although it is difficult to ascertain the exact causes of the recession, the connection between Canada ending its procyclical system and the extreme severity of the recession strongly suggests that the termination of the procyclical system exacerbated the recession. Canada clearly shows the advantages of a procyclical system because while they used one their economy underwent unprecedented growth, but after they halted it for political reasons their economy suffered.
In conclusion, the United States should adopt a procyclical immigration policy that adjusts the short-term immigration rate according to current economic conditions. Not only is the procyclical system successful at managing immigration in an economically beneficial way, but it is also advantageous because it is politically neutral and therefore efficient. Currently, in US politics there is much debate over immigration, to the point where the arguing is preventing any policy from being implemented. Since procyclical immigration systems are politically neutral, people from all sides can easily agree on it, creating a solution to the United States’ immigration problem much more efficiently than years of debate over polarizing systems.
References and Endnotes
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